The Good Ole Days
The financial crisis of 2008 was a scary time in the U.S. Although the early half of Gen-Y had a hard time getting a job after graduation, a large portion of millennials didn’t really suffer feelings of despair, since most were still in their teens and early 20s. We didn’t have to experience first-hand our asset values melting like soft-serve on a hot, sunny day. As for bankruptcy, job loss, and car repossessions — not our style, not our time.
In order to correct the mistakes that precipitated the financial crisis of the Great Recession, the government passed the Dodd–Frank Wall Street Reform and Consumer Protection Act, effectively appointing referees to call out the banks when they step out of bounds or commit a foul against the consumer. In the five years since the Dodd-Frank Act became law, financial stability has increased, but the effects of heavy regulation are starting to seep through the cracks. Unfortunately, those unintended consequences may hinder economic growth, which has been harder to find of late than a politically correct statement from a billionaire real estate mogul with a combover — but I’m not naming names.
The Four Things to Know About the Dodd-Frank Act
1.) The Financial Stability Oversight Council (FSOC, pronounced eff-sock) was created to regulate the stability of the big banks. The purpose of the FSOC is to keep these banks that are considered “too big to fail” from failing. They make it happen by constantly putting them through stress tests and making sure they adhere to the increased capital requirements so that when shit hits the fan, taxpayers aren’t left on the hook, or broke.
2.) Under the umbrella of the FSOC comes the Office of Financial Research (OFR), which consists of a bunch of econ, finance, and stats nerds in a room collecting and analyzing data. Their sole purpose is to create different models to assess risk, forecast the future with graphs, and provide all this info to FSOC so they can take out the belt on the big banks. Ow-ow!
3.) The Consumer Financial Protection Bureau (CFPB, pronounced see-eff-pee-bee) was created to make sure consumers aren’t being dealt a bad hand. They prey on predatory lending, simplify mortgages, and stand guard during transactions to keep the mortgage brokers from making too much money. They also deal with financing cars, credit cards, debit cards, and would love to receive a thank you card.
4.) The Volcker Rule, named after former Fed Chair Paul Volcker, keeps banks from speculating, or performing risky trades that may not be in the depositor’s best interest. No effing around.
Too Big To Fail?
Regulation almost always comes about as a reactive measure in order to be proactive in the future. Case in point, the Dodd-Frank Act was drafted and made law in response to the fun times back in 2008-09. One key mission of the reform was to keep banks and financial institutions from being “too big to fail,” yet it’s pushing out the small banks and making the big banks even bigger.
Although the decline of small banks was already underway before this piece of legislation, according to the Harvard Kennedy School, small community banks have lost over 35 percent of the market share since 2010 — and at a faster rate than before Dodd-Frank was passed. The increased regulations come with increased costs, which only fat banks with fat pockets can afford. As a result, small banks are dropping like flies and moving the money to the big dogs. Perhaps we may be missing the mark on the “too big to fail” mandate.
As the smaller banks get out of the game, so does the competition. As the consumer options disappear, so do competitive rates on loans. Increased rates on top of added regulation can make borrowing money a pipe dream.
Paying A Little More For Security
Capital requirements, or safe-asset requirements, for financial institutions have increased all around the world, and this is a good thing.
The increased scrutiny of banks’ debt asset holdings have also slowed down lending, in an attempt to curb private debt from getting out of control (keep in mind: for every action, there is an opposite reaction). Further, the banks have pulled back on speculating, aka gambling, a practice that took a huge share of the blame for the financial crisis — Thanks, 1-800-GAMBLED our assets.
Historically, the probability of a financial crisis has stayed steady at around four percent per year. With the last crisis costing an estimated $12 trillion, some experts claim that reducing the chances by even a small percentage point is worth the costs of the Dodd-Frank. Even Janet Yellen, the forecasting ace and Queen of the Fed, has argued that paying a little more for security is not a bad thing.
Where’s the Economic Growth?
Some experts claim that it even with these regulatory costs, Dodd-Frank allows for increased economic growth. As small banks are being pushed out of business and competitive rates slowly disappearing, this can make that claim hard to believe.
Remember how we talked about every action eliciting an opposite reaction? With the banks holding back on lending, non-bank lenders have jumped into the debt market to pick up the slack. Alternative lenders coming in only transfers the debt problem, rather than eliminating it. Furthermore, with wage growth proving lethargic and people increasingly giving up on even trying to find a job, the added security is not Gen-Y’s top priority.
All in all, it is quite thoughtful of the government to come in and start policing the country’s financial systems. But after almost five years, it appears the Dodd-Frank Act may only be worsening the problem it has been attempting to fix.